Why employee ownership is reshaping law firm succession
July 1, 2026
Employee ownership is one of the fastest-growing business models in the UK.
Several amendments were suggested following the latest review of the financial reporting standard applicable in the UK and the Republic of Ireland (known as FRS 102). The standard applies to the financial statements of companies and other types of entities that prepare accounts under UK GAAP (Generally Accepted Accounting Standards).
The proposed amendments, suggested in Financial Reporting Exposure Draft 82, are not yet final and the treatment of the suggested changes, in a valuation context, are yet to be confirmed, however, there are several key areas you should be aware of if you are selling your business and these changes are implemented.
Two key changes have been proposed – the introduction of a new model of revenue recognition and a new procedure regarding accounting for leases.
1. Changes to Revenue Recognition
The revenue recognition changes are likely to have little impact on your business valuation, with the only consideration being a potential decrease in maintainable EBITDA (Earnings before Interest, Tax, Depreciation and Amortisation), a benchmark used to measure a company’s performance and valuation. This would occur as a result of decreased revenue, as a result of revenue no longer being recognised over time – as it is currently – and instead only recognised after some contracts are completed. However, a review of your business engagement letters could limit the potential impact of this.
2. Changes to Lease Accounting
Proposed changes to lease accounting could have large repercussions on the technical value of a business.
Firstly, the change from the current treatment of operating lease costs for items – such as rent being recognised as rental costs in the profit and loss account – to the suggested treatment of rental costs being recognised as depreciation, will greatly increase a company’s EBITDA. This would be as a result of the newly recognised depreciation costs being added back as the ‘D’ part of the EBITDA adjustment, whereas currently, they are included within administrative expenses and therefore not added back to the profit. This means under the typical technical methods of valuing a business, when we apply a multiple to a maintainable EBITDA, the resulting value of the business will be greater than under current lease accounting rules.
Secondly, the change to the whole of the lease being brought onto the balance sheet at the start of the contract, instead of being recognised as an expense on a straight-line basis over the life of the lease, will mean that when making a technical ‘cash free debt free’ adjustment to get to the equity value of the business, the debt reduced from the value will be much higher than under the current lease accounting rules, decreasing the final equity value of the business.
Employee ownership is one of the fastest-growing business models in the UK.
For many law firm partners, the idea of stepping away from their practice can feel daunting.
Mergers and acquisitions in the UK legal sector are more than balance sheets and client lists: they transfer professional responsibilities,
Law firm mergers demand sensitivity, expertise, and discretion. By working with ALFMA members, you gain access to advisers who:
Every merger is a defining moment. With ALFMA at your side, you can approach it strategically, confidently, and with the assurance that your firm’s future is in safe hands.
The Association of Law Firm Merger Advisers are a team of proven market experts, to help you take the risk out of merging your business.
If you would like to speak with a member of the team you can contact us below.
